Understand how the demand for labour and the supply of labour influence wage determination in the labour market.
Think of the labour market like a dance floor. 👯♂️ The employer is looking for dancers (workers) to keep the music (production) going. The more dancers the employer wants, the higher the wage they must offer to attract them.
Mathematically, the demand for labour is represented by the Marginal Revenue Product of Labour (MRPL):
\$MRPL = \frac{d(TR)}{dL}\$
where TR is total revenue and L is labour input.
Now imagine the dance floor again. The workers decide how many hours they want to dance. They compare the wage offered to the opportunity cost of their time. If the wage is high, more people will join; if low, fewer will.
The supply of labour is often shown as:
\$S_L = f(W)\$
where W is the wage rate.
The equilibrium wage is where the demand curve (downward sloping) meets the supply curve (upward sloping). This is the point where the quantity of labour demanded equals the quantity supplied.
\$MRPL = S_L\$
| Factor | Affects Demand | Affects Supply |
|---|---|---|
| Product price | ↑ → ↑ demand | — |
| Technology | ↓ → ↓ demand (more efficient) | — |
| Worker skills | — | ↑ → ↑ supply (more skilled workers) |
| Wage rate | — | ↑ → ↑ supply (more workers willing to work) |
During a tech boom, the demand for software developers rises sharply. Employers offer higher wages to attract talent. Meanwhile, the supply of developers increases as more students choose computer science, but the wage still stays high because the demand outpaces the supply.
Define key terms: demand for labour, supply of labour, equilibrium wage.
Show a diagram: label the demand and supply curves, indicate the equilibrium point.
Explain shifts: use the table above to discuss why curves move.
📝 Remember to use the correct notation (MRPL, SL) and to explain the economic intuition behind each shift.